New California Law Threatens To Destroy Plan Uniformity

Companies often include a choice of law provision in their equity and other compensation plans. Some companies include a choice of law in the award agreement, either in lieu of, or in addition to, the plan document. Specifying applicable law helps to ensure that plans are consistently interpreted and applied. Uniformity may be particularly important for companies with employees in multiple jurisdictions. Occasionally, I see award agreements or plan documents that also include a choice of forum clause. Companies often specify Delaware law and courts even when they have no employees in Delaware – apparently because the they are incorporated in Delaware.

A recently enacted California statute will soon cast a shadow on these provisions. New California Labor Code Section 925 will prohibit an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

Require the employee to adjudicate or arbitrate outside of California a claim arising in California.

Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

Any provision of a contract that violates this statute will be voidable by the employee. If a provision is rendered void at the request of the employee, the matter must be adjudicated in California and California law must govern the dispute. In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees. The law will apply to any contract entered into, modified, or extended on or after January 1, 2017. There is an exception for contracts with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement.

Section 925 doesn't expressly invalidate contractual provisions specifying non-California law. Such provisions are voidable (not void) and only when they deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

This legislation started life as a “spot bill”. A "spot bill" makes trivial changes to a statute as a placeholder for future substantive changes. The author amended the bill to prohibit choice of law and forum provisions in consumer contracts. After a Senate Judiciary Committee informational hearing in March, the author amended the bill again to add similar prohibitions in employment agreements. Later, the consumer contract prohibitions were dropped.

SB 925 is not French*

The legislation is fraught with ambiguities. For example, does the phrase “as a condition of employment” limit the application of the law to only agreements upon which employment is conditioned or does it extend to agreements pertaining to the employer-employee relationship (such as stock option and other incentive award agreements)? It is also unclear what California protections will count as "substantive" for purposes of the statute. Curiously, the bar on requiring adjudication outside California applies to a “claim arising in California” while the bar on depriving an employee of the substantive protection of California law applies to a “controversy arising in California”. It is unclear whether the legislature intended any distinction, but the close juxtaposition of these two phrases all but invites litigation.

You can watch the informational hearing here and read the background paper here.